‘Non-event’, is how a more outspoken observer of the Reserve Bank of India (RBI) described the 62nd meet of its Monetary Policy Committee (MPC), in the run-up to the just-concluded meet. Others, more diplomatic, or, perhaps, wary of displeasing the central bank, chose their words more carefully. But the broad consensus was that the MPC would stand pat; on rates for sure and, in all probability, on stance (neutral) as well.
So, the unstated question after RBI Governor Sanjay Malhotra read out the MPC Statement at the conclusion of the MPC’s meeting on Wednesday was whether it was a non-event.
A careful reading of the statement shows it was anything but, with the MPC striking a far more dovish note than expected (warranted?). Central banks in many major emerging markets have already hiked their rates. Agreed, each central bank takes decisions based on its own assessment of domestic growth-inflation trade-offs.
But at a time when the biggest uncertainty stems from the external sector, if our MPC, alone, opts for a radically different course of action from its peers, it must have some very convincing reasons.
Unfortunately, try as one might, these are absent in the statement. The reality is the current growth-inflation trade-off does not warrant soft peddling on inflation. Consider. At the MPC’s April 2026 meeting, growth for 2026-27 was projected at 6.9%, and inflation at 4.6 % (more than double the previous year’s 2.1%). Since then, the pace of inflation has quickened.
At the June meeting, real GDP growth for 2026-27 was projected marginally lower at 6.6 %. But inflation was projected significantly higher at 5.1 %. In August, the growth estimate for this fiscal year has been upped, yes upped, to 6.7% while the inflation estimate has been lowered a tad, from 5.1% to 5%.
What does this translate into? Apart from the fact that the MPC’s estimates need to be taken with a huge pinch of salt, given heightened external risks, a repo rate of 5.25% implies a negative real rate of interest for the next three quarters. With the concomitant demand pressures that this will bring.
At a time when bank credit growth is already way ahead of deposit growth and the savings rate in the economy has fallen sharply, this is hardly good policy.
Add to this the narrow rate differential between US interest rates and ours, and the MPC’s refusal to read the writing on the wall and at least begin the process of tightening defies understanding.
The market has long been signalling upward pressure on rates. The 10-year benchmark government bond yield, considered the floor for corporates borrowing in the bond market, is up (6.81% on Tuesday) as against 6.60% at the start of the year, despite RBI’s attempts to groom the market and keep liquidity in surplus.
Despite this, for the MPC it seems to be a case of Plus ça change, plus c’est la même chose (the more things change, the more they remain the same), in the words of 19th century French critic Jean-Baptiste Alphonse Karr.
Part of the reason might be the MPC’s apparent belief that core inflation matters more than headline.
The term ‘core inflation’ (excluding food and fuel inflation) has been mentioned eight times in Governor Malhotra’s Statement; as against just once in the December 2024 statement of previous governor Shaktikanta Das. Remember, RBI’s mandate of “price stability, keeping in mind the objective of growth” defines ‘inflation’ as headline, not core, inflation.
Given the decision to retain the definition of ‘inflation’ as ‘headline’ (and not ‘core’), at the March 2026 review of the inflation targeting regime, this is inexplicable. More so in a country like India, where food and fuel constitute more than half the consumption basket, and core is of no relevance to a majority of people.
Ironically, as recently as May 2026, Poonam Gupta, Deputy Governor in charge of monetary policy, speaking at the National Council of Applied Economic Research, New Delhi, pointed to how the international experience in inflation targeting favours the choice of headline over core inflation.
“Of the 48 countries that currently operate under an [inflation targeting] framework, 47 target headline inflation. Several countries that initially adopted core inflation as their target, including Thailand and Norway, subsequently transitioned to headline CPI,” she added. RBI and MPC’s sudden fascination with core inflation is, therefore, hard to understand.
It might be too late to correct Wednesday’s policy mistakes. Former Fed chair Ben Bernanke liked to say, “Monetary policy may be 98% talk and only 2% action but the cost of sending the wrong message can be high.”
So before the October meet, the MPC might do well to mull over the advice given by former PM and former RBI governor Manmohan Singh to then RBI governor D. Subbarao, also a technocrat and bureaucrat like Governor Sanjay Malhotra.
“The RBI is a different institution,” cautioned Singh. “When you go there, you get immersed in numbers: money supply, credit growth, repo rate, interest rate, inflation rate. You forget that there are real people behind that. Remember, whatever you do, there are people behind who will get affected.”
The author is a senior journalist and a former central banker.